Fuel prices: cut now, pay later

The UPA government is coming under increasing pressure to hand Indian consumers a Diwali bonanza — a cut in fuel prices. This makes no economic sense, but having especially encouraged politicization of the pricing of mass consumption fuels, the UPA may find itself unable to resist the Left and indeed, even some of its allies chasing vote-bank brownie points.

It was just the other day that both finance minister P. Chidambaram and petroleum minister Murli Deora asserted that fuel prices would not be cut for now since the retailers — largely state-run oil marketing companies — were still not breaking even. Deora explained that with a weakening rupee, the fall in global oil prices had not lowered the oil import bill adequately.

Thursday’s turnaround in stance came with Deora saying the case for a cut would be re-examined after the Opec meet on Friday. This was his response to some members in Parliament asking for “a bailout for the common man” as global oil prices have come crashing. It’s pertinent to note here that over the past three years of surging oil prices, consumers were well protected from sharing the burden.

In the period since mid-2005, during which average crude prices doubled, India saw little market alignment. Petrol and diesel prices were raised in February — marginally — after 20 whole months, and then in June by 10% in recognition of the perilous finances of oil marketing firms. Kerosene prices have not been raised since 2002. And cooking gas prices have been raised just once — this year — since 2004. So, the only rationale, if any, for cutting prices at this time is electoral compulsion. As policymakers have repeatedly said, this approach will mean continuing with the big-ticket fuel subsidy regime at the cost of India’s economic growth.

Ironically, on Tuesday, Deora urged consumers to use fuel prudently. But, while a slowing economy will contain industrial demand and induce fuel efficiency, the pricing of 65% of India’s fuel consumption is controlled and retail demand cannot be rationalized when the prices are anything but real or market-driven. If the government wants to ease the pressure on consumers, it must ease the fuel tax burden on them through the required set of reforms.

Is there a case for fuel price cuts? Write to us at views@livemint.com